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Judgment
Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the Income Tax Act, 1961, has referred the following
question of law for the opinion of this court:
Whether the profits earned by the assessee in the export of hides and skins for the assessment years 1963-64 to 1966-67 are export profits
entitled for the rebate under the relevant provisions of the Finance Act ?
As the question itself implies, the reference relates to the assessment years 1963-64 to 1966-67 and the question raised is a common one. The
assessee is a reputed exporter of tanned hides and skins for nearly 100 years. As far as the present reference is concerned the question involved
relates to certain amounts earned by the assessee differently called as "" selling commission "" or "" discount "" in respect of the transactions carried out
in the following manner as found by the Tribunal. To represent the assessee in foreign markets, the assessee enters into agency agreements with
foreign firms by which the foreign firms represent the assessee in foreign markets as its agents. Selling commission of 2 per cent on all sales of
tanned hides and skins is payable by the assessee to the foreign representatives. As per the terms and conditions of the agency agreements, sight
drafts are to be drawn on the foreign agents or their buyers for 100 per cent value and shipments are to be effected within two months from the
date of booking of the order of the foreign agents. The assessee then registers with the Reserve Bank of India the agency agreement with their
selling agents to facilitate remittance of commission amount of 2 per cent on all the exports of tanned hides and skins. The foreign representatives of
the assessee-firm places an order for the supply of hides and skins specifying the trade mark and also quoting the rate. On receipt of the order, the
assessee approaches the local dealers, negotiates the price and then sends a confirmatory letter to its foreign representatives giving the details of
the prices, trade marks of the commodity exported, date of shipment and mode of payment. The assessee then issues a letter of authority to the
local dealers authorising them to directly ship the goods to the assessee''s agent abroad. The local dealer then ships the goods to the foreign
representatives of the assessee. In the invoice prepared by the local dealer, the discount of 1 per cent payable to the assessee, commission of 2
per cent payable to the foreign representatives, cost of insurance, etc., are all deducted. The invoice is countersigned by the assessee. The
assessee then issues a letter of authority to its bankers on the basis of which the dealer receives payment for the goods shipped on the presentation
of the shipping documents.
The discount of 1 per cent received by the assessee on all the hides and skins exported to its foreign representative for the assessment years
1963-64 to 1966-67 was claimed by the assessee as export profits entitled for the rebate u/s 2(5)(i) of the Finance Act, 1963, and Section 2(5)
(a)(i) of the subsequent Finance Acts. The Income Tax Officer, while accepting the explanation of the assessee that the commission on sales was
received from the foreign customers, disallowed the claim on the ground that the exports were not made on its own account and the assessee had
not directly shipped the goods. On appeal, the Appellate Assistant Commissioner held that the relevant provisions of the Finance Act did not
require the assessee to export goods in its own name to earn the benefit and since the assessee played a substantial role in bringing about the
export of hides and skins, the commission earnings arising from the part played by the assessee in the export of hides and skins should be treated
as profits arising from the export of hides and skins and consequently the assessee is entitled to the benefit of the rebate u/s 2(5)(i) of the Finance
Act, 1963. Against the order of the Appellate Assistant Commissioner, the department took up the matter in appeal to the Tribunal. On behalf of
the revenue it was contended before the Tribunal that-
(i) the export of goods were directly made by the local dealers themselves under instructions from the assessee and, therefore, the income derived
therefrom only indirectly was connected with the export of goods;
(ii) the earnings were directly attributable to the services rendered to the foreign principal and not to the export of any goods"" and hence the
assessee was not entitled to any rebate. The Tribunal held that-
(i) the assessee was a seller of hides and skins to its agents abroad;
(ii) the assessee had purchased the tanned hides and skins from the local dealers and they have been shipped to the assessee''s foreign agent at the
risk and on account of the assessee;
(iii) there is no privity of contract between the foreign representatives and the local dealers;
(iv) instead of the assessee physically shipping the goods to its foreign representative, the goods have been shipped by the local dealers on behalf
of the assessee;
(v) the assessee, in short, is the buyer and seller of the hides and skins in the foreign market through its representative and this surely constitutes
export and any income derived from this transaction had to bear the label of export profit. It is, in this view, the Tribunal dismissed the appeals
preferred by the department. It is the correctness of this conclusion of the Tribunal that is challenged in the form of the question extracted already.
It is necessary to refer to the relevant statutory provisions. Section 2(5)(i) of the Finance Act, 1963, which is the same in respect of the
subsequent years also, is as follows :
(5) In respect of any assessment for the assessment year commencing on the 1st day of April, 1963-
(i) an assessee being an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of
dividends within India or an assessee (other than a company) whose total income includes any profits and gains derived from the export of any
goods or merchandise out of India, shall be entitled to a deduction, from the amount of Income Tax and super-tax with which he is chargeable of
an amount equal to the Income Tax and super-tax calculated respectively at one-tenth of the average rate of Income Tax and of the average rate of
super-tax on the amount of such profits and gains included in the total income.
The question for consideration is whether the 1 per cent which the assessee received on the export of hides and skins can be said to be profits
and gains derived from the export of the hides and skins. We are of the opinion that having regard to the facts found by the Tribunal, there can be
no dispute that the said amount constitutes profits derived from the export of hides and skins. We have already referred to the findings of the
Tribunal and for the purpose of clarity, we repeat that the Tribunal found, (1) the various local dealers shipped the hides and skins on account of
and at the risk of the assessee ; (2) the invoice prepared by the dealers containing the prices less, commission and discount was countersigned by
the assessee ; (3) there was no privity of contract between the foreign representative and the local dealer; (4) any difference in prices was
invariably debited against the assessee by the foreign representative. In addition to that, there was also the finding by the Appellate Assistant
Commissioner which was not disturbed by the Tribunal to the effect that the assessee is responsible for ensuring the quality of the goods and their
proper shipment. Having regard to these and also the further finding that the assessee is the buyer of the hides and skins from the local dealers, it is
clear that the assessee first purchases the goods from the local dealers and thereby becomes the owner thereof and subsequently exports the
goods; but it exports the goods in the names of the various persons from whom it purchases the goods, on account of and at the risk of the
assessee itself. Consequently, it is clear that though the exports are made by the dealers from whom the assessee purchases the goods in India,
those dealers acted merely as agents of the assessee for the exports in question and it was the assessee which was really the exporter in respect of
the goods. Consequently, the 1 per cent , whether it is called by the name of commission or discount, the assessee earned on the export of the
goods in question will certainly constitute profits derived from the export of hides and skins. As a matter of fact the very question referred to the
High Court assumes this. Under these circumstances, we answer the question referred to this court in the affirmative and in favour of the assessee.
There will be no order as to costs.